Question

Suppose Omni Consumer Products’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years. Year Cash Flow Year 1 $275,000 Year 2 $400,000 Year 3 $475,000 Year 4 $400,000 If the project’s weighted average cost of capital (WACC) is 9%, what is its NPV?

Answer 1

The NPV of the project is approximately $101 million.

Step-by-step explanation:

To calculate the NPV (Net Present Value) of the project, we need to discount the future cash flows to their present value. This can be done by using the formula:

NPV = (Cash Flow Year 1 / (1 + WACC)^1) + (Cash Flow Year 2 / (1 + WACC)^2) + (Cash Flow Year 3 / (1 + WACC)^3) + (Cash Flow Year 4 / (1 + WACC)^4)

Plugging in the values, we have:

NPV = ($275,000 / (1 + 0.09)^1) + ($400,000 / (1 + 0.09)^2) + ($475,000 / (1 + 0.09)^3) + ($400,000 / (1 + 0.09)^4)

Simplifying the equation and solving, the NPV is approximately $101 million.